Planned sale of student loan backed bonds

There is a big sale of student loans planned – and the loans are all federally backed. Securities made up of or combined with student loans are set to go on the market very soon. Is this sale of government-backed loan credit by private businesses a good idea? Or are companies relying on taxpayers to bail them out should something go wrong?

Post resource: Student loan backed securities up for sale by Personal Money Store

How student loans have worked

Up until the recent student loan bill passed, student loans have been privately administered. Private companies administer the loans, but the government backs them up should the students default on the loans. In theory, students get the best personal cash loan through this private lending system. A new student loan bill changed this practice, and the federal government will now administer loans.

Securities backed by student loans

Much like the subprime mortgage securities that very nearly brought down the entire economy, student-loan backed securities are “bundled.” A group of loans is combined and re-split into “loan-backed securities” that are bought, sold, and traded by investors. Many investors consider these "safe" investments because they are government backed. A business owned by Citigroup Inc. is going to be selling $ 855 million worth of these securities. $ 1.23 billion of student loan backed bonds and securities could be sold by Bank of America. A full $ 1.7 billion of bonds will be sold by Sallie Mae.

Is this security a good investment?

Because they’re guaranteed loan securities the government, in the end, backs up, these are considered very safe investments. The federal government and taxpayers who take on the risk of these student loan bonds, however, will not be seeing much benefit. This situation has been partially resolved, but not entirely. The new student loan bill removes private businesses from the middleman position. Some are wondering if the government will continue to sell these financial products? At least the taxpayers will see the benefit if the government does continue this practice.